Pliant middle class is key for China

China's middle class is driven by a thirst for basic consumer goods, one bank says, and is easy to manage

By Alex Frew McMillan

HONG KONG, China --A rosy economic future for China hinges on a middle-class population that is easy to manage and eager to buy, according to chief China economist for BNP Paribas Peregrine.

Chen Xingdong, a self-professed China bull with a twist, spoke at a Hong Kong luncheon on Thursday about the challenges he saw for this country in the aftermath of joining the World Trade Organization.

"The future is rosy, it's true," he said. "To me, the most difficult part is the transition." It's not what China is becoming but how China gets there, he said.

What is the key to China's success? "Labor, labor, labor," Chen said at the luncheon.

At the same time, he believes a lack of jobs is the biggest threat to a rosy future. Like Japan, China faces wrenching economic change as it breaks with its old-economy past.

"Those changes will be painful, let's be honest," he told reporters.

Fortune 500 already there

Average middle-class familes in cities like Shanghai earn close to $14,500 a year, when their resources are pooled

There is certainly no doubt in the minds of many executives that China will become a powerful player on the world business stage. Of the Fortune 500 companies, 80 percent are already operating in China.

BNP Parisbas Peregrine predicts China will become a manufacturing giant. The bank points to China's extremely low wage -- just an average of 60 U.S. cents per hour per worker.

But to achieve that end, China with a market of 1.3 billion people, will rely not on a knowledge economy but on a pliant and mildly educated work force, some China commentators say.

China already ranks low in the college graduates stakes, with just 3.6 percent graduating in 2000. That compares with 20.7 percent in Japan, 21.1 percent in South Korea and 46.5 percent in the United States, with those figures from slightly different years.

Elite not important

But Chen reckons the key lies not in the elite few raking in the cash, but in China's emerging middle class. In all, 616.5 million people, or 48.7 percent of China's population, went through middle school.

Those people may be the key to China's manufacturing might. Overseas executives believe they are easy to manage, show strong self-discipline and are keen to get ahead.

Even though statistics are scant and those that exist are dubious, Chen says the growth is clearly there in China

That is creating a middle class that experts now peg at 200 million, or 15 percent of the population.

Those people make, on average, 30,000 yuan ($3,620) per year. That is well below industrialized standards.

But they live in households averaging three to four people, making for an average household tally approaching 120,000 yuan ($14,500).

Chen admitted that those statistics are pure estimates. The figures simply don't exist in most areas, he conceded.

And the statistics that do exist are dubious at best. Even China itself admits that business statistics in the country are suspect. But that is not the point, Chen said.

Industrial nation

For the last 22 years, China's cumulative annual growth rate is 9.4 percent. Even if a full 3 percentage points of that are padding, 6 percent is still a runaway rate.

Despite figures showing many multinationals are losing money through joint ventures in China, Chen believes they are still making large profits from selling Chinese-made goods overseas.

Multinationals deliberately play down their pricing on export forms, masking their profits, he alleged.

Whatever the case, China is on its way to becoming an industrial nation of massive proportions, Chen said.

He stated the turning point came in 2000, when China's economy crossed the $1 trillion mark and became the sixth-largest in the world.